The Myanmar Companies Law (“MCL”), with a view to promote corporate governance and transparency has defined related parties and come up with compliance requirements for related party transactions which is one of the distinct features of the new law. The changes which have been introduced to the MCL affects the general financing between related parties and requires additional compliances to be looked into before entering into financing transactions.
The definition of a related party under the law is in itself quite wide and covers a large spectrum and can be highlighted as follows:
- A related party of a company as per S. 1 (c) (xxxiii) (A) of MCL includes a person who is in a position to control the company. The term control has not been defined under the MCL which gives rise to several interpretations. However, as per general understanding control would mean the control over the management of the affairs of the company and the decisions taken by the board of directors of the company.
- The term person referred to in this definition is exhaustive enough to include shareholders having majority voting power, directors and other officers who are in a position to control the management and decision making of the company. This definition also includes holding companies which controls the composition of the board; or is in a position to effect or exercise control over voting rights in a resolution; or holds more than half of the issued shares of the first company.
- The definition of a related party as per S. 1 (c) (xxxiii) (B) covers associates of the company (excluding related body corporates). An associate as per S.1 (c)(ii)(A) of MCL includes a director or secretary of the company; a director or secretary of a related company (holding companies, subsidiary companies, subsidiary of a holding company); and the persons who control or are controlled by the company. The persons who are in control of a company have already been mentioned.
- Persons who are controlled by the company includes managers, employees, agents and other staffs of the company.
- An associate as per S.1 (c)(ii)(B) of MCL also includes a person (including a company) with whom the company is acting in concert or there is a formal agreement to act. This envisages situations where there are takeovers or acquisitions and two companies are acting in concert in the transaction for acquiring stakes in a third company. As per the definition these two acquiring companies are related parties.
- Where there is a formal or an informal association between two companies or between a company and a person with respect to a transaction or any associated matter in relation to the transaction, they are said to be associates and included in the definition of a related party. This could essentially mean in cases of a joint venture, the two parties are related parties. Even for transactions arising out of such joint venture with third parties, all the parties become related parties. We need to keep a close eye on the wide interpretation given to the wordings of this clause as this would cover a variety of transactions, thus triggering compliances related to related party transactions.
- A spouse, parent or child of an associate of the company are also related parties as per S. 1 (c) (xxxiii) (B) of MCL.
- Any company which is controlled by any of the persons who have been mentioned above would fall under the category of a related party. A subsidiary which is a company whose majority shareholding or composition of the board and in effect the control is under the first mentioned company would also be covered under the definition of a related party.
The definition of a related party under the newly enacted MCL is very wide and includes a wide range of possibilities on the coverage of related parties. A host of transactions would also get included as a related party transaction thus entailing triggering of the compliances as per S. 187 and S.188 of MCL.
Any transactions involving related parties have to meet certain compliance requirements. The compliance requirements under the MCL affect the financing of all related parties as mentioned above. Financing of related parties as per S. 187 includes the providing of loans to related parties, giving of guarantees in cases where a loan has been taken by a related party and entering into contracts related to any sort of financial benefit to related parties.
The term financial benefit could again include a variety of financing including the giving of a security on behalf of the related party; releasing of an obligation or a debt of a related party; infusing of working capital in a related party; leasing of property to a related party; and the providing of any other services to a related party. In addition to the above mentioned, contracts entered into for financial benefits to a related party would also include providing a third-party security for a related party’s financing. The acquisition of shares between a related body corporate or companies having related parties where either of the companies or related body corporates have dormant directors are also well within the scope of contracts providing for financial benefits under S. 187 of MCL. The provision entails a broad scope of contracting and includes a host of financing transactions as seen above to include financial benefits falling under the purview of related party transactions and thus affecting the general financing of related parties.
Financing to related parties takes place subject to an authorization by the board when the board is satisfied that such financing is reasonable and is in a manner which is in the best interest of the company. In addition to this, such transactions should be entered into at an arm’s length (both parties acting in their self-interest). The said transaction must also be recorded in the register of interests maintained by the company as per S. 189 of MCL.
In cases where the financing is not done with compliance of law, the related party who was financed is liable to make a repayment of the finance so provided by the company. All such financing of the company must be disclosed by the directors in the annual general meeting in keeping with the good corporate governance standards.
The board authorization for general financing to related parties is subject to a shareholder approval as per S. 188 of the MCL. However, before a notice is sent to the shareholders for the relevant meeting, a filing needs to be made with the Directorate of Investment and Company Administration (“DICA”) recording the proposed notice of the resolution and all material information regarding the proposed resolution including methods of voting for the resolution and details and particulars of the financing and the related parties who are being financed. DICA, subject to considerations, within 28 days determines whether the notice regarding the proposed resolution would be sent to the shareholders or not. Upon receiving a positive determination from DICA, the shareholder voting can take place. However, the related party being financed is not entitled to vote on the resolution.
Therefore, it is important to note that every financing to a related party is subject to a three layered process. DICA takes into consideration material information on the financing before approving a meeting of shareholders where such a resolution would be decided on. Thereafter, a shareholder approval is necessary. Only after the satisfaction of these two steps can the director authorize the financing to related parties. Such authorization is also made only after taking into account the best interests of the company.
The erstwhile Myanmar Companies Act (“MCA”), although had provisions on conflict of interest, related parties were not expressly defined nor were related party transactions mentioned. The widened scope of the definition of a related party and the detailed compliance requirements before providing any kind of financing to related parties shows the intent of the government to avoid conflicts of interest and promote the best practices of corporate governance. However, the definitions are broad enough to capture a host of transactions as related party transactions, thus triggering compliance requirements as per the MCL. Companies need to be mindful in their approach to not be in breach of the law.
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This article is written by DFDL Lawyers.
This article was first published on the DFDL website.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.